At $159, JPMorgan Stock Has A Limited Upside

by Trefis Team
-3.18%
Downside
172
Market
166
Trefis
JPM
JPMorgan Chase
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JPMorgan stock (NYSE: JPM), the largest bank in the U.S. in terms of total assets, gained roughly 25% – increasing from about $127 at the beginning of 2021 to around $159 currently, outperforming the S&P500, which grew 11% over the same period. 

There were three clear reasons for this: First, the approval of the $1.9 trillion stimulus check plan. Second, an accelerated Covid-19 vaccination drive in the U.S – 46.2% of the total U.S population has now received at least one dose. Third, the Fed has decided to maintain its benchmark rate near zero, which is expected to continue for a couple of years.

But is this all there is to the story? 

Not quite, despite the recent gains, Trefis estimates JPMorgan’s valuation to be around $163 per share – slightly above the current market price – based on one key opportunity and one risk factor.

The opportunity we see is an improved trajectory for JPMorgan Revenue over the subsequent quarters. JPMorgan reported full-year 2020 revenues of $119.5 billion – 4% higher than the 2019 figure, mainly due to a 26% growth in the corporate & investment bank segment, partially offset by a 7% y-o-y drop in the consumer & community banking unit. The growth in corporate & investment bank was driven by a 39% jump in sales & trading and a 25% rise in investment banking revenues, due to the impact of the higher trading volumes and underwriting deals, respectively. Further, the consumer & community banking segment suffered in the year due to a 10% decline in the net interest income (NII) driven by the lower interest rate environment and a decrease in outstanding loans, followed by a drop in card purchase volumes due to lower consumer spending levels. Notably, the segment contributed roughly 43% of the total revenues in 2020 – down from 48% in 2019. 

The same momentum continued in the first-quarter FY2021 as well, with JPM reporting 14% y-o-y growth in revenues to $32.3 billion. It posted a 46% rise in corporate & investment bank revenues driven by growth in investment banking (mainly equity underwriting) and sales & trading businesses. Further, on the same lines as 2020, the community and consumer banking revenues suffered a 6% y-o-y drop in the quarter. It was primarily due to a 14% decline in NII, partially offset by a 12% growth in non-interest income. The recovery in non-interest income was due to growth in average deposits, client investment assets, and card purchase volume, which is likely to continue in the subsequent quarters. Notably, the bank has seen continuous growth in Assets under Management (AuM) over the recent quarters, which touched $2.8 trillion in Q1 – up 4% sequentially, benefiting its asset & wealth management segment. That said, growth in corporate & investment bank is tied to higher trading volumes and underwriting deal volumes, which are expected to normalize in the coming months. But, till then, the segment will likely drive its quarterly results. Further, the low-interest rates are likely to continue for some more time, pressuring NII. However, the recovery in consumer demand and continuous growth in AuM will benefit JPM’s top-line. Overall, we expect JPM’s revenues to remain around $119.5 billion for FY2021.

JPM’s net income margin is likely to improve in FY2021 from 22.9% to 27.3% due to the positive effect of lower provision for credit losses. Markedly, the bank released the loan loss reserve of $5.2 billion in the first quarter, resulting in a net provision figure of -$4.2 billion. Altogether, it is likely to result in an EPS of $10.95 for the year, which coupled with the P/E multiple of just above 15x will lead to a valuation of around $163.

Finally, how much should the market pay per dollar of JPMorgan earnings? Well, to earn close to $10.95 per year from a bank, you’d have to deposit about $1095 in a savings account today, so about 100x the desired earnings. At JPMorgan’s current share price of roughly $159, we are talking about a P/E multiple of just above 14x. And we think a figure closer to 15x will be appropriate.

That said, banking is a risky business right now. Growth looks less promising in core banking, and near-term prospects are less than rosy. What’s behind that?

Although the bank has reduced its provisions for loan losses over the recent quarters, signaling some improvement in the loan repayment capability of its customers, the repayment capability is directly linked to the health of the economy. If the economic conditions deteriorate, the bank is likely to face significant loan defaults – JPMorgan has a loan portfolio of around $434 billion in consumer & community banking and $207 billion in commercial banking ( as per Q1 FY2021 figures). Additionally, the low-interest-rate environment will likely hurt the NII of the bank. To sum things up, we believe that JPMorgan stock is slightly undervalued and offers limited upside. 

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